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Is July and a company needs to buy 1 million pounds of cheese in December. The company wants to use Milk Futures to hedge its
Is July and a company needs to buy 1 million pounds of cheese in December. The company wants to use Milk Futures to hedge its risk where each contract is for delivery of 200000 pounds. The spot price of milk is $17/pound, the futures price for delivery in December is $17.5/pound, and
the futures price for delivery in January is $17.9/pound. Using historical data, the standard
deviation of the change in the spot price of cheese is 0.235, the standard deviation of the change
in the milk futures price is 0.136 and the coefficient of correlation between the change in the spot price and the change in the futures price is 0.95
Assume that the position is closed out in November. When the position is closed the spot
price of milk is 16.4 $/pound, the Milk futures price for delivery in December is $17.4/pound, and the Milk futures price for delivery in January is 18$/pound. What is the profit or loss in the futures contracts for the company when closing the position?
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